Friday, October 21, 2011

A tightening market for mortgage finance

This week both Citibank and BoCom announced that they would no longer be offering residential mortgages (in Bocom's case "traditional" mortgages). Although not as publicly announced, other banks have been tightening their lending criteria beyond the cooling measures imposed by the Hong Kong government. As a matter of anecdotal support, the bank which has loaned my most of my outstanding mortgages has told me that they will not lend me any more money.

The driving force behind the tightening of the mortgage market is the steady rise in the loan to deposit ratio in the Hong Kong banking system. For HKD deposits, the ratio has risen from around 65.1 in October 2009 to 85.9 in August 2011. A similar increase occurred in the all currency ratio (from 50.1 to 67.9). These ratios reflect an increase in total lending by Hong Kong banks (currently the highest since 2006 which was the earliest year in the HKMA table I was looking at).

Given the tightening of the mortgage market (higher deposits, more stringent borrower evaluation and higher interest rates) and lower turnover in the property market, one would expect that the value of mortgage loans would be falling. It's not. In fact the total value of outstanding residential mortgage loans hit an all time high in August.

Although speculative, I suspect that many borrowers (including myself) are unwilling to repay loans early. HIBOR linked loan taken out over the few years before the tightening began are still paying less than 1% on those loans. Not only is this a negative real interest rate and well below the yield on property, but new loans are more expensive (likely 2-2.25% depending on which bank you approach) and harder to obtain.

For my part, I have no intention of paying off any of the loans on my investment properties early and am increasingly coming to the view that I should not pay off the loan on my home early either. I can revisit if HIBOR starts rising.

8 comments:

Anonymous
said...

Why would you draw a distinction between paying off your home mortgage and paying down a mortgage on an investment property? Surely if you decide to reduce debt levels you would select the one with the highest rate and in most places this would be on a investment property.

Of course since you will probably not pay either, the question is academic but i have wondered a couple of times.

From a purely mathematical perspective, there is no difference between paying down a mortgage on an investment property and a mortgage on our home. Paying down the home is more of an emotional decision than a financial one.

In terms of paying off the most expensive mortage first, all are less than 1% and there isn't much to chose between them except that the interest on the loans used to buy investment properties are fully tax deductable while we only get a limited tax deduction for the interest on the home loan - and that will shrink to zero if/when we stop earning salaried income.

So right now there is not a lot of difference but once we retire the home loan would actually be the most expensive.

That said, given the yield available on stocks, bonds etc and the inflation rate it feels wrong to be paying off such cheap debt. If HIBOR rises a few percentage points, I'll probably change my mind.

Behind the argument for not paying off your mortgage is the reasoning that you could invest the extra moneyand earn a higher return, while keeping your money more liquid. That may have been a good reason in the past but the rate of return on investing now is more questionable, compared to the fact that every dollar paid to reduce a mortgage balance provides a guaranteed return equal to the interest rate on the mortgage.

Ultimately you will have to evaluate your situation. If you are in a longer adjustable rate mortgage, like a 7-year or a 10-year ARM, decide how long you want to stay in the house and figure out how much time you have before your rate adjusts. If you have less than one year left, it is probably time to refinance.

As of now, the HIBOR (Hong Kong Inter-bank Offered Rate) has increased to 0.4-mark (for 3-month maturity period) compared to 0.28 last October, and that's according to HK Assoc. of Banks. So how much increase do you need before you change your mind and pay off the mortgage?